School of Management

When greed is not good: SOM meets the demand for forensic accountants

From the Fall 2010 issue of Reaching Higher: The Binghamton University School of Management Magazine

By Brian Crawford

In the 1987 film Wall Street, Michael Douglas, as the fictional arbitrager Gordon Gecko, tells assembled stockholders
that "Greed, for lack of a better word, is good." Now much maligned, Gecko's point
was that desire for financial gain is an evolutionary force that fosters the building
of new businesses and motivates the creation of empires. But as Associate Professor
Louis Braiotta likes to point out, when greed spirals out of control into fraud, it
also can lead to the downfall of great firms, with harmful ripple effects for employees,
shareholders, customers and entire communities. Braiotta adds that, unfortunately,
greed is by far the primary motivation for business fraud, but accounting students
in his Senior Auditing 460 class are learning how to use internal controls to help
spot deceit in a company’s financial statements and "red flag" behaviors that might
indicate financial deceit.

The financial losses to business due to fraud are enormous. The Association of Certified
Fraud Examiners (ACFE) estimates that this year, businesses will lose an average of
five percent of their revenues to fraud ? more than $600 billion in the United States
alone. Worldwide, more than $3 trillion are lost annually to fraudsters, according
to the Association’s 2010 Report to the Nations on Occupational Fraud and Abuse.

Individual scandals on the order of Enron and the more recent Bernard Madoff fraud
total in the tens of billions of dollars, garner newspaper headlines and result in
Congressional hearings, yet the greatest proportion of occupational frauds take place
in smaller organizations that lack the resources to develop strong internal controls
and hire external auditors. As a result, small businesses are more prone to be victimized
by fraudsters who misappropriate assets, create inaccurate financial statements or
engage in conflicts of interest or other forms of corporate corruption. Businesses,
both big and small, are looking for employees who have the analytic skills and knowledge
to help combat fraud, making forensic (investigative) accounting one of the most in-demand
fields in the accounting industry.

Although the School of Management doesn’t have specific classes in forensic accounting,
students learn to "follow the money" throughout the SOM accounting curriculum. With
rigorous training in generally accepted accounting principles, they learn to understand
how a company's financial statements should read — all the better to notice when they
don't. In Braiotta's auditing class, students are organized into teams that serve
as a virtual CPA firm. Using publicly available documents and records, students develop
a broad portfolio of exhibits on firms such as Walmart and FedEx, including a fraud
risk assessment. In pre-audit brainstorming sessions, they question where and how
a company earns its revenues, what authority corporate executives have to override
financial transactions and reports, and whether there are obvious conflicts of interest.
They gain the fundamentals of forensic accounting through close analysis of financial
statements and utilize analytics — data analysis, vertical and horizontal analysis
of financial statements and trend recognition — to discover potential patterns of
fraud.

More diabolically, students also learn how fraudsters inflate revenues, steal funds
and profit from conflicts of interest. They examine cases such as the Roslyn School
District credit-card fraud, where $11 million was stolen from the taxpayers of a Long
Island township, and they review videos provided by the Association of Certified Fraud
Examiners (ACFE) detailing instances of occupational fraud. For example, they learn
about the ZZZZ Best Carpet Cleaning Company stock scam in the late 1980s that raked
in more than $200 million for an essentially worthless business. Braiotta says that
students are often shocked to learn of the ingenuity with which frauds are committed
and covered up, like how the owner of ZZZZ Best even went so far as to spend $2 million
to build a phony work site to fool outside auditors. In essence, Braiotta teaches
the tricks and deceits of practicing fraudsters, prefaced with the strong admonition,
"Don't Do This!"

Students also learn to identify "red flags" that can suggest unscrupulous activities
— the outgoing clerk who drives a Ferrari, the stressed-out salesperson with a house
in foreclosure or the secretive executive who won't take his vacation lest his schemes
be discovered. In fact, most fraud cases are solved as a result of confidential hotlines
and tips from co-workers and customers who raise questions about unusual behaviors
or financial transactions. Braiotta reminds his students that it was the actions of
whistleblowers Sherron Watkins at Enron and Cynthia Cooper at WorldCom that provided
federal prosecutors the information they needed to secure convictions in these multi-billion-dollar
frauds.

With many of his students preparing to enter the workforce, Braiotta encourages them
to be aggressive about fraud prevention and to be knowledgeable about the entire range
of techniques available to firms to discourage theft and deception. Even the most
thorough audit will find fraud only after it has occurred, so it is far better to
prevent fraud in the first place. Braiotta emphasizes the anti-fraud strategies advocated
by the ACFE, teaching his students effective anti-fraud measures such as company hotlines,
surprise audits, fraud training and strong codes of corporate conduct. Executives
in the best organizations establish a climate in their firms that informs employees
that ethical behavior will be rewarded — and fraud will be discovered and punished.

Experts agree. There is no way to completely eliminate occupational fraud. Even with
the best anti-fraud measures in place, there will always be an unscrupulous person
who, driven by greed, will fudge the numbers or pocket a kickback. As a result there
will always be job opportunities for accountants with forensic skills. Currently,
the public fascination with fraud and white-collar crime is helping drive demand for
forensic accountants — though they also are frequently hired to help untangle complicated
financial arrangements in civil cases such as divorces. Even the FBI and CIA are hiring
accountants who can track the funds of terrorists and drug cartels. With divorce rates
at 50 percent and the costs of corporate fraud increasing annually, it is no wonder
that forensic accounting consistently ranks among the "hot jobs" available for business
students.

SOM students are very well-prepared to take jobs in this growing field. Braiotta says
that his students are "bright, independent, skilled communicators," who are adept
at both the technical and human side of accounting. The background they have in business
ethics, as well as their classroom exposure to the different vignettes of fraud cases
and theoretical knowledge of fraud prevention, ensures that they are well-prepared
to take jobs in this growing field.